Why the U6 Underemployment Rate Is MisunderstoodJason Stipp: There are a couple of things that I wanted to talk to you about that a lot of folks are pointing to as potential negatives, other negative indicators in the job market and I think the biggest one that we hear a lot of folks talk about is this U6 rate. This is the rate that includes workers who are part time, who would want to be full time but they cant find the work and otherwise marginally attached workers. Can you first tell us a little bit about what does that U6 number encapsulate and why is it higher than the headline on employment number?Bob Johnson: Its meant to be a more comprehensive number, a way of looking at the job situation and I think some people try to misuse the number a little bit. They try to say, “Well, when you really add all these components together; you were as bad as a great depression” and thats just not true. I think there has been some workout. There are some academic work where people have looked back and said “Well, if you constructed U6 the same way that is constructed the day, youd be at something like 37% and 38% unemployment rates on the U6 basis during the great depression.” So, were nowhere near that. Right now, the number is about 16.6%Jason Stipp: Okay. And thats an important point about U6 is that when you go back historically, you actually have to sort of rebuilt it because this figure hasnt been around for that long, right?Bob Johnson: Thats correct. Thats what makes it hard to use metrics. Its only been around since 1990 and those were two relatively mild recessions coming out of that. The interesting part of it is, the two major components, the regular unemployment and working part time but really want to be working full time components are available back to the 1950s. Taking these two figures together and tracking them back, we can actually see that we were in a worse situation in the 1980s in that recession. So, this is a new ground. I mean this number, unemployment goes up, the U6 should go up. I mean its natural to say that well, weve got this other hidden unemployed people -- no, thats not how to look at this number.Jason Stipp: You really have to try to compare it to past recession, so you can see what the trend has been there. This number U6 is always going to be higher.Bob Johnson: Right.Jason Stipp: Than the headline unemployment number. So, its how it was compared to past recession, you can figure that out, you can get a better sense.Bob Johnson: And one other thing that Id add on that is that people who want to throw that all in unemployment, if somebody works 33 hours and that person gets -- theyre told to stay home one day at a week or something like that and get down to 32 hours. Well, thats a part time worker. I mean that may hurt a little bit but thats not any way they perform like somebody is completely laid off. Its a whole different world.Jason Stipp: Its so important to indicate that there could be some noise in those numbers as well. The other thing that Ive been reading about in a negative sense, a lot of it will point to this. Its a potential problem is the duration of unemployment which seems to be especially long this time around. Is there any truth to the fact that unemployment is longer in this recession and whats behind that?Bob Johnson: The duration of unemployment always gets longer during a recession. Thats given and natural unlike any other recession thats happened this time. But even longer term, there has been a trend towards longer and longer periods of unemployment but less and less people are also laid off. In the 1970s, we laid off a lot of people. In fact, the lay off rate at our peak this time was practically the normal level for the 1970s but the difference was those people were off of work for four weeks, eight weeks while they shut down a plant, adjusted this and then they were all merely called back and unemployment this time around or over time has gradually increased. There are a few other things that work here. As the population gets older, youre going to see that duration naturally go up. 50-year-olds tend to be employed for far longer than 25-year-old. I mean -- and almost an older magnitude, so its a big number. And so, that hurts the number and the obvious is we get more tech going to jobs that require more training, people tend to hang on to people longer, people tend to stay a little bit longer on their jobs and people are very reluctant to hire somebody knowing that theyve got to do all these training and get that person up. So, that hurts the number. And also, the New York Fed did a study on this; the big dispersion in wages has been a huge factor increasing the duration of unemployment where most jobs are doing kind of the same thing, pay the same thing. Well now, there is a bigger and bigger variety just like there was everywhere else in our society where weve got a bigger dispersion of numbers and then when people sense that why should I take this $10.00/hour job as attempt somewhere when I know if I wait long enough, I can get the same job at the real company for $50.00 an hour in a month or two, why should I take the $10.00/hour offer?Jason Stipp: Because some people may be holding out for that better job because theyre seeing that potential dispersion in their possible salaries.Bob Johnson: So, theres a whole bunch of reasons for it.Jason Stipp: So, given that, it does seem to be a trend that is real. Should we be worried about it? Is this something from an economic standpoint that we should bring our hands over? I mean obviously, there could be some impacts from a suicidal standpoint but as an economist, how do you think about it?Bob Johnson: Yeah. Well, I mean I think you hit it on the head. I mean the suicidal impacts are large. I mean youre going to create a group of very discouraged people that arent going to be able to find jobs and do they breakdown those layers of society so to speak and I think that certainly a real and legitimate concern and certainly the people in that situation, its got to be exceptionally painful and I feel deeply for the people that are stuck in that boat where theyve tried hard and nothing involves to their own, really cant find something because theyre just starting to have the right set of skills to do it. So, the worst of it is the suicidal thing. From an economic standpoint, Ive always stressed, its the total level of wages that really drives the economy and from that, if the people that are working make a higher wage or youve in general got a few more people working or youve got them working longer hours, you put those things together and you get more dollars, thats what an economist really wants to track. So, I feel deeply. The long term unemployment is a real problem but I dont think its going to kill the economic recovery.Jason Stipp: Okay, well Bob, thanks so much for adding that extra context and some of those extra metrics when thinking about the unemployment rate. Its helpful for getting more of a complete picture.Bob Johnson: Great, thanks.Jason Stipp: For Morningstar, Im Jason Stipp. Thanks for watching.